Former Federal Deposit Insurance Corporation (FDIC) Chair Sheila Bair likens the fall of crypto exchange FTX and its former CEO Sam Bankman-Fried to the infamous Ponzi Scheme of Bernie Madoff. “It felt very Bernie Madoff-like in that way,” she said.
Former FDIC Chairman Compares FTX and Sam Bankman-Fried to Bernie Madoff’s Ponzi Scheme
Sheila Barr, a top US regulator during the 2008 financial crisis, explained in an interview with CNN on Monday that there are eerie parallels between the rise and fall of FTX and former CEOs Sam Bankman-Fried and Bernie Madoff.
Bair chaired the Federal Deposit Insurance Corporation (FDIC) from 2006 to 2011. She now sits on the board of directors at blockchain infrastructure firm Paxos.
She explained that both Bankman-Fried and Madoff proved adept at coaxing sophisticated investors and regulators into ignoring red flags hiding in plain sight. FTX filed for Chapter 11 bankruptcy last week and Bankman-Fried stepped down as CEO.
“Charming regulators and investors can distract [them] from digging in and seeing what’s really going on,” Bair described, elaborating:
It felt very Bernie Madoff-like.
Madoff ran the largest Ponzi scheme in history, worth approximately $64.8 billion. He promised investors high returns, but instead of investing, he deposited their money in a bank account and made payments on request from existing and new investors’ funds. He was sentenced to 150 years in federal prison for fraud, money laundering and other related crimes. Madoff died in prison on April 14 last year at the age of 82.
Bankman-Fried secretly transferred about $10 billion of customer funds from FTX to his other trading firm Alameda Research and reportedly used a “backdoor” to avoid triggering accounting red flags.
FTX achieved a $32 billion valuation with investment from major corporate and venture capital firms including BlackRock, SoftBank and Sequoia. Barr commented:
You get this herd mentality where if all your peers and marquee names in venture capital are investing, you’ve got to, too. And that adds credibility with Washington policymakers. It all feeds on itself.
The former FDIC chairman isn’t worried about the FTX explosion threatening the entire financial system like Lehman Brothers did in 2008, noting that crypto is still a relatively small part of the broader economy and financial market.
However, the crypto market remains largely unregulated, leaving investors vulnerable if something breaks. Bair stressed:
It is time for crypto to settle on a regulatory regime and figure out who is regulating what because people are getting hurt.
The former regulator further urged investors to use caution and be skeptical. “If it sounds too good to be true, it probably is,” she said.
